Estimating a semiparametric asymmetric stochastic volatility model with a Dirichlet process mixture

We extend the asymmetric, stochastic, volatility model by modeling the return-volatility distribution nonparametrically. The novelty is modeling this distribution with an infinite mixture of Normals, where the mixture unknowns have a Dirichlet process prior. Cumulative Bayes factors show our semiparametric model accurately forecasting market returns. During tranquil markets, expected volatility rises (declines, then rises as the shock …